Oil Shale, 2017, Vol. 34, No. 3, pp.

279–294 ISSN 0208-189X

doi: https//doi.org/10.3176/oil.2017.3.06 © 2017 Estonian Academy Publishers

EFFECT OF INNOVATION IN
UNCONVENTIONAL OIL INDUSTRY:
CASE OF ESTONIA AND CANADA

KALEV KALLEMETS(a)*, TÕNIS TÄNAV(b)

(a)
Faculty of Economics, Tallinn University of Technology, Akadeemia tee 5,
12618 Tallinn, Estonia
(b)
School of Economics and Business Administration, Faculty of Social Sciences,
University of Tartu, Ülikooli 18, 50900 Tartu, Estonia

Abstract. The objective of this paper is to compare the economic effects of

innovation in an unconventional oil industry, based on Estonian and
Canadian experiences with oil shale and oil sands, respectively. Both
unconventional oil resources face similar challenges and need to resolve
these through innovation. Based on empirical evidence, this paper concludes
that innovation is a key mechanism of increasing efficiencies and triggering
investments. Investments themselves, due to their nature, represent the best
measure of the economic effect of cumulative innovation in the unconven-
tional hydrocarbons industry.
The paper proceeds in the following manner. First, we will briefly review
the relevant literature and identify definitions of innovation and its impact on
economic growth. In the second part, we will point out the effects of
innovation in the energy industry on economic growth, and the uniqueness of
energy innovation. Then we will present data on public and private R&D
expenditure in the oil sands industry in Canada, as well as evidence of the
results and economic effect comparatively to the R&D effort in Estonian oil
shale industry. Lastly, we will draw conclusions by discussing our findings.
The results are relevant to indicate R&D expenditure necessary to sustain
investments and economic effects of developing unconventional hydrocarbon
mineral resources.

Keywords: unconventional oil industry, national energy policy, industrial

policy, innovation policy.

Part 1. Innovation and its economic impact

The creation and application of new knowledge and technology is a major

contributor to overall human wellbeing and economic growth and has thus

*
Corresponding author: e-mail kalev.kallemets@gmail.com
280 Kalev Kallemets and Tõnis Tänav

become on the agenda of different policies [1]. For example, the European
Union (EU) has set a strategy for improving the conditions for research and
development and is pursuing this goal through increasing combined public
and private investment in R&D to 3% of GDP [2].
Endogenous growth models, which estimate that growth has been driven
by technological change through R&D, have been known for some time
[3, 4]. The difference in R&D between countries can explain some of the gap
between their growth levels and economic development stages [5, 6]. Endo-
genous growth models link knowledge accumulation through education,
training and research to innovation or new technology, which in turn
influences overall output. Therefore, setting the agenda for innovation
through increased R&D investments seems straightforward.
However, the notion of innovation remains ambiguous in some contexts.
In a survey of literature on innovation, Edison et al. [7] found over 40 defini-
tions. The most widely used definition develops on the core ideas of Joseph
Schumpeter [8] and is now used in the Community Innovation Survey by
Eurostat as defined on p. 46 in the Oslo Manual: “Innovation is the imple-
mentation of a new or significantly improved product (good or service), or
process, a new marketing method, or a new organisational method in busi-
ness practices, workplace organisation or external relations” [9]. The key is
implementation, i.e. introduction to the market, which distinguishes innova-
tion from invention.
Besides R&D, the local or national innovation system influences
innovative activity [10, 11]. The innovation system theory itself describes
the institutional environment and its synergy, how well the different features
are interlinked and supporting each other. These features can be framework
institutions such as the financial legislative environment, attitude towards
entrepreneurship or taxes, but also educational environment for human
capital, infrastructure, business support, financial services or business
standards, and governing political environment [12]. There are comple-
mentarities involved for the innovating agent even within some of these
links, such as the university-industry R&D [13].
Still, one of the most widely accepted policy instruments is dealing
directly with R&D expenditure [14]. Seminal works from Arrow [15] and
Nelson [16] have pointed out the need for public support for entrepreneurs
due to the lack of demand certainty and return on investments leading to
suboptimal levels of investment and, hence, societal loss. This gap between
private and social returns is the principal argument for government inter-
vention in innovative activity. A straightforward linear model in case of
which R&D turns into inventions, products and sales dates from the 1940s
[17]. Much later, studies have indeed estimated that social returns to R&D
have been greater than private returns, effectively arguing for R&D subsidies
to generate spillovers [18, 19].
Studies have measured R&D and its effects, rate of return and spillovers
since the late 1950s. Hall et al. [20] conclude that on the whole the R&D rate
Effect of Innovation in Unconventional Oil Industry: Case of Estonia and Canada 281

of return in developed economies is positive and is most likely between 20

and 30%. Measuring social returns is more complex. These spillovers can be
in the form of knowledge or rent [19]. This means that knowledge generated
from an R&D project can be used by other firms for their own purposes. Hall
et al. [20] point out four spillover sources for a firm: a) other firms in the
same sector, b) firms in other industries, c) public research laboratories and
universities, and d) firms, laboratories, universities and governments in other
countries. There is no universal rate of return of R&D spillovers; measure-
ments across countries, sectors and time have high variability, implying that
R&D spillover rate of return is different in different locations, but it should
be noted that it is almost always positive. Parsons and Phillips [21] estimate
that the Canadian median R&D domestic external rate of return is 56%. The
investigators have not found evidence for a similarly constructed study in
Estonia.

Part 2. Innovation in energy industry and its economic effects

The energy sector has an abundance of multinational enterprises and R&D

spillovers should be measured on an international level. Innovations have a
cumulative nature and incremental innovations tend to diffuse over time,
turning into widespread technological innovations [22]. To illustrate, it took
several decades from the 1860s to 1920s to have wide use of petrol as
transportation fuel [23]. In the energy sector, commercialization of innovations
is costly, therefore R&D is linked also with demonstration. This happens at the
early stage of technical development, before commercialization, and it may
never be followed by actual deployment [24]. Another element of innovation,
learning-by-doing, applies to all stages of innovative activity, from the early
stages of R&D to reducing costs in production through experience.
Bettencourt et al. [25] studied global energy patents from 1970 to 2009 in
conjunction with R&D investments. They found that market-driven invest-
ments and public R&D complemented each other in creating technological
development. They added that according to their modelling, the effect of
these investments persisted over the long term, supporting the ideas of tacit
knowledge and absorptive capacity.
Innovation in the energy sector has led to higher supply (making difficult
resources economically accessible), lower costs and prices to consumer,
lower environmental impact, higher safety (especially relevant in nuclear
energy) and security of supply. On a large scale, these elements cannot be
captured as private rent, but accrue benefit to the wider society, justifying
public funding of related R&D. Each innovation can also lead to major
wealth transfer effect and macroeconomic benefits, for example, utilization
of tight oil and gas in the USA has led to a substantial decrease of oil
imports and increased oil supply, as well as oil industry, transport and other
professional services within the USA [26].
282 Kalev Kallemets and Tõnis Tänav

It has been estimated that the decline of technological innovations in the

US energy sector between the 1970s and 1990s was mostly influenced by
reduction of investment in government funded R&D [27, 28]. Margolis and
Kammen [28] conclude that this disinvestment hampers the US ability to
provide long-term energy security and deal appropriately with global
environmental sustainability. Indeed, by the 2000s US oil imports had grown
to levels that started to be considered a strategic security problem [29].
Significant volatility and inconsistency in funding can also have signifi-
cant adverse effects and in the USA there have been substantial funding
shifts from year to year for both large research fields (e.g., coal, nuclear
power) and smaller research areas (e.g., carbon capture and sequestration,
nuclear safety) [30]. It is also telling that the US energy industry invests only
0.42% of its revenue in research. In contrast, the pharmaceutical industry
puts 20.5% of sales into R&D, and the aerospace and defense industry
spends 11.5%. At US federal level 60% of R&D spending goes on defense,
about 25% on health and the energy sector receives just 2% [31].

Part 3. Data on public and private R&D expenditure in the

oil sands industry in Canada and evidence of the results and
economic effect comparatively to Estonian oil shale industry

Canadian oil sands are either loose sands or partially consolidated sand-
stones containing a naturally occurring mixture of sand, clay, and water,
saturated with a dense and extremely viscous form of petroleum technically
referred to as bitumen. Athabasca-Wabiskaw oil sands in Canadian province
of Alberta cover over 140 000 square kilometers and contain approximately
1.75 Tbbl (280 × 109 m3) of crude bitumen. About 10% of the oil in place,
or 173 Gbbl (27.5 × 109 m3), is estimated by the Government of Alberta to
be recoverable at current prices, using current technology. This recoverable
quantity amounts to 75% of total North American petroleum reserves. Only
about 20% of the recoverable oil contained in the 3% of the oil sands area
can be produced by surface mining, so the remaining 80% will have to be
produced using in-situ wells.
Already in 2014, 58% of the oil sands volumes were produced using in
situ methods. Alberta will continue to rely to an ever increasing extent on in
situ production in the future, as 80% of the province’s proven bitumen
reserves are too deep underground to recover using mining methods [32]. In
situ or Steam Assisted Gravity Drainage (SAGD) was indeed developed in
1984–87 by the publicly funded Alberta Oil Sands Technology and Research
Authority (AOSTRA) Underground Test Facility [33]. This technology has
led to several billions of dollars in investment and annual revenue from
production facilities. The multiplier effect of this particular innovation is in
the order of multiple thousands. AOSTRA has been converted to Alberta
Effect of Innovation in Unconventional Oil Industry: Case of Estonia and Canada 283

Innovates – Energy and Environment Solutions (AI-EES) which has set

itself equally high targets for 2030 [34]:
• 50% reduction in GHG intensity;
• 20% of new in situ production partially upgraded; and
• 15% production from challenging reservoirs.
In 2015 it invested $17.5 million in 89 projects aligned to meet these
targets. The value of these projects over their lifetime is $312.2 million, of
this AI-EES will have provided $82.9 million, leading to an approximate
leverage factor of 2.8. AI-EES supports the development of innovation
capacity by investing $7.7 million at universities for two Centres, 12 Chairs,
and 36 individual researches [35]. In 2015 it completed the Oil Sands Com-
petitiveness Study.
The major focus of AI-EES is National Partial Upgrading Program. Started
as the “next generation upgrading” initiative over 10 years ago, AI-EES
realized that given the market conditions, full upgrading of the heavy bitumen
was uneconomical for the near future. Therefore the Competitiveness Study
quickly evolved into an exercise to quantify the partial upgrading
opportunities for Alberta’s bitumen. In this three-stage study, AI-EES worked
with industry and governments of Alberta, Saskatchewan and Canada to
understand: a) the refining value of Western Canadian bitumen in different
regions; b) selection of partial upgrading technologies with most potential;
c) the potential value back to the producer for a partially upgraded product in
Western Canada. The program has funded two technologies for development
and commercialization. Results of the Competitiveness Study show a partial
upgraded crude product could net an additional $5 to 10 billion in annual gross
revenue for Western Canadian producers by 2035 [36].
Also Alberta Innovates Technology Futures funds in large-scale oil sands
related R&D. Its 2015–2016 budget was approximately $150 million, while
in 2014, about $50 million came from the private sector and $100 million
from the public sector [37]. One example of research focus can be Materials
and Reliability in Oil Sands (MARIOS) program initiated in 2009 to reduce
maintenance cost and unscheduled shutdowns. It is estimated that the oil
sands sector spends over $3 billion on maintenance every year and forfeits
another $5 to $7 billion in lost revenue due to both scheduled and uns-
cheduled shutdowns. As a result, there is a strong incentive for oil com-
panies and their supply chain to improve the run-life and reliability of
components, equipment and processes in their operations.
At national level, Sustainable Development Technology Canada (SDTC)
has been leading Canada’s investment in energy, agriculture, forestry, min-
ing, transportation and energy efficiency industry since 2000. In 2015,
SDTC approved 32 projects for funding by it, bringing the total number of
SDTC funded projects to 320 with 928 million dollars allocated. Out of the
320 supported projects, 73 were commercialized as of 2015. SDTC’s support
has enabled these companies to raise estimated $2 billion follow-on financ-
ing. This has in total created 9200 jobs direct and indirectly. Estimated
284 Kalev Kallemets and Tõnis Tänav

Annual Revenues generated by SDTC funded companies in the market at the

end of 2015 were $1.4 billion. Of the 141 SDTC funded projects completed
by December 2015, a total of 73 have climate change mitigation benefits and
together these technologies have realized an annual GHG emissions reduc-
tion of approximately 6.3 megatons CO2e in 2015 [38].
Having been established in 2005 in partnership with Imperial Oil, the
University of Alberta Institute for Oil Sands Innovation (IOSI) is the
leading oil sands centre in basic research to find breakthrough technologies
for oil sands processing. To date, IOSI has received funding amounting to
$51 million from public and private funds and supports more than 160 top
researchers from around the world. In 2015 they published 21 academic
technical papers and during 2007–2015 carried out 18 study projects on
cleaning and partial upgrading, 16 on extraction, and 5 on tailings process
fundamentals [39].
The key for the innovation to have economic impact is its penetration into
wider use. While innovation by individual company creates competitive
advantage, sharing and wider penetration of technology can actually be
limited. Oil sands producers have overcome this problem by a mutual
technology sharing platform called Canada Oil Sands Innovation Alliance. It
consists of 13 member oil sands companies that have shared 814 distinct
individually developed technologies and innovations that cost almost
$1.3 billion to develop [40]. These innovative solutions reduce greenhouse
gases, minimize impact on land, reduce water use and improve tailings
management.
In 2015–16, when oil prices were below 50 USD/bbl, the focus of innova-
tion shifted to cost reduction and revenue maximization. Findlay [41] has
found in his study “The Future of the Canadian Oil Sands” that the challenge
for current and proposed mining and steam-assisted gravity drainage projects
is to develop technological improvements to a magnitude that meet, and
ideally exceed, the detriment of decreasingly prolific rock. There certainly is
hope with novel solutions like in situ tech-solvent extraction, Electro-Thermal
Dynamic Stripping Process and microwave heating. Producers have their own
large R&D budgets – Canadian Natural Resources Limited leads the pack with
450 million CAD spent in 2014, while Suncor, Syncrude, Imperial Oil and
Cenovus each spend roughly 100–200 million CAD annually.
Research groups such as CERA, IHS, and the Conference Board of
Canada, among others, have developed in-depth calculations to demonstrate
the economic value added by oil sands development. Though the estimates
vary, annual GDP impact hovers around CAD$100 billion and supported
more than 478 000 direct, indirect and induced Canadian jobs in 2012
(3% of all jobs in the country), though this did drop in 2015 with the
depressed prices for crude and reduced capital investment. This amounts to
approximately 5% of Canada’s GDP. In 2012, oil sands production directly
accounted for almost one-third of Alberta provincial government revenues
and 6% of federal revenues [42].
Effect of Innovation in Unconventional Oil Industry: Case of Estonia and Canada 285

In the first decade of the 21st century alone, $117 billion oil sands-related
investment has taken place. The Conference Board of Canada’s analysis
shows that $1 billion in oil sands investment generates 2200 person years
employment direct effect, 2700 supply chain and 1400 in income effect
person years employment in Alberta [43]. Additional employment will take
place also in British Columbia due to transportation and refining of products
and Ontario due to supply chain and income effects in the most populous
Canadian province. The Figure illustrates the extension of supply chain
effect to various sectors of the economy.

Figure. Sectors experiencing supply chain effects (share of employment, %) [43].

Canadian public research and development financing totaled 9.5 billion

CAD in 2013, yet its total R&D funding has fallen from 2.09% of GDP in
2000 to 1.61% in 2014 [44]. The total government energy sector research
funding was estimated to be $941.9 million for 2014–15 (CAD 439 million
federal and CAD 503 million provincial and state-owned enterprises), down
from CAD 1.34 billion in 2013–14, according to the International Energy
Agency (IEA). IEA suggests increasing public R&D funding for energy
projects [45].
However, Canadian R&D funding ecosystem is very robust, providing
support in all stages from basic research to applied, demonstration,
commercialization and market development. Each of those is crucial to have
economic impact from R&D. Canada has every reason to fund energy
research as it has substantial conventional coal, gas and oil reserves, and the
country has developed its own original nuclear power reactor design on
heavy water called CANDU. Canada also possesses substantial hydropower
and renewable energy potential, but technically and environmentally the
most challenging and with the highest economic potential are large Alberta
oil sand deposits.
286 Kalev Kallemets and Tõnis Tänav

A technically and environmentally similar unconventional hydrocarbon

resource is Estonian oil shale that has been mined and utilized mainly for oil
production and power generation since 1916. After Estonia re-established its
independence in 1991, there have taken place structural and proprietary
changes in the oil shale industry as well and today, it consists of one state-
owned and two private companies with a combined turnover of 933 million
euros in 2014 and with 15 million tons of oil shale mined annually. Since the
increase of oil prices in 2005–2007, the companies have invested sub-
stantially in research and development to work out new techniques to reduce
environmental impact, increase energy efficiency, and process effectively
fine oil shale, which accounts for the majority of material produced by
mining.
In 2012–2013, the oil shale sector R&D expenditure was more than 20%
of total Estonian R&D expenditure. It needs to be noted that substantial
innovative technology investments (such as part of cost of Enefit 260 and
Petroter oil shale processing units) were listed as R&D expenditure. Based
on the Estonian Patent Office’s data, Estonian oil shale research accounts for
approximately 9% of all patents and 6% of all useful models issued.
In 2012–2013, the largest Estonian oil shale company, Eesti Energia AS,
in partnership with a Finnish Outotec company, invested in a technology
development company Enefit Outotec Technology. Through its subsidiaries
Eesti Energia invested in the feasibility studies of Utah and Jordanian oil
shale projects. By the spring of 2017, the latter project will be finalized as a
2.1 billion USD agreement in place on building a 554 MW oil shale-fuelled
power plant.
The economic impact of oil shale industry in Estonia is quite relevant in
terms of GDP impact, net exports, government revenue, and as employer.
Indirectly, the industry offers employment to 17 372 people [46]. In 2014,
the net government revenue from the oil shale industry was 174 million
euros [47].
Estonian public funding of energy related applied R&D has been
significantly driven by the European Union’s Structural Funds and criteria,
with the EU funds financing amounting to about 50% of total funding.
Started in 2010, three major programs are: 1) Support of Energy Technology
Research and Development managed by Enterprise Estonia (EAS) and
Archimedes (7.1 million euros), 2) Smart Specialization (26 million euros),
and 3) Support of Strategic R&D managed by the Estonian Research Council
(28 million euros, with the EU funding of 23.7 million euros). The former
program was totally focused on energy technology and 40% of financing
was used for oil shale related research. The latter two programs include some
elements of oil shale and energy related research, but these account for no
more than 10–20% of the total program. In the case of EU funded programs
there have been set rules for program management and financing, which
enables no proactive research agenda direction by a program managing
organization.
Effect of Innovation in Unconventional Oil Industry: Case of Estonia and Canada 287

An exception is the Environmental Investment Centre that funds studies

and research related to energy and environment from environmental fee
revenues, albeit the share of R&D is still smaller than in the abovementioned
programs. In the case of the Support of Energy Technology Research and
Development program, there was prepared an interim report containing
several recommendations for improvement [48], but no final report on the
results and economic effect of the studies was presented. Thus, the economic
impact, the leverage factor of the studies, is to a great extent unreported.
According to oil shale field professionals, the practical effectiveness of the
program funded research is yet low.
In its 2013 report about Estonian energy sector, the International Energy
Agency concludes that the country’s pertinent policy agenda has been set in
a number of documents such as various development plans until 2020, and
recommends, among other things, “to continue to promote research and
development of oil shale technologies“ [49]. According to the European
Commission, Estonia with Germany are the only two EU member states that
are not using any R&D tax incentives in any form [50]. In general, with
1.4% of GDP, Estonia’s R&D funding is lower than the EU’s average
(2.1%) or the official goal set in the Estonian Entrepreneuship Growth
Strategy 2020 (2%) [51] or the 3.2% of GDP of the leading peer group
countries, Sweden and Finland equally [52].
According to the IEA, in 2014 the share of energy related research in total
R&D in its member countries was on average 4%, being far down from the
11% of 1981. With 12% Japan was the leading country in 2014. In the EU
member states, the equivalent is much lower, averaging 3%, with Finland’s
figure being, for example, 9% and Estonia’s 1.6%. The average ratio of public
energy research, development and demonstration (RD&D) budget per unit of
GDP is 0.4 (RD&D budgets per thousand units of GDP) and varies greatly,
ranging from less than 0.1 in Portugal and Spain to over 1 per thousand in
Finland. Among fossil fuel producers, the respective US figure is 0.35,
Canada’s 0.7, Norway’s 0.86 and Poland’s 0.23. Estonia with 0.12 strikes the
eye as a country with one of the lowest public energy RD&D budgets per unit
of GDP, spending almost 6 times less than Canada (see Table 1) [53].
Table 2 presents comparative economic output data for power and oil
production in Estonia. Comparative data for Canadian oil sands and Estonian
oil shale industries are presented in Tables 3 and 4, with an obvious
difference in magnitude. However, several clarifications are necessary: only
one-third of oil shale mined in Estonia is processed for oil production, the
rest is used for power generation. There is a substantial economic difference
between the two applications summarized in Table 2, the main difference
being in that the value generated per unit of raw material is more than twice
higher, and labor intensity is higher as well [54].
288 Kalev Kallemets and Tõnis Tänav

Table. 1. R&D spending of selected International Energy Agency member

countries in 2014
Member country Energy related research in total Public energy RD&D budget per
R&D funding, % 1000 units of GDP
Finland 9.0 1.0
Canada 7.2 0.7
Estonia 1.6 0.12
IEA average 4.0 0.4

Table 2. Comparative economic output of power and oil production from oil
shale in Estonia [54]
Economic indicator Power generation Oil production
Energy efficiency, % 35–40 65–78
Capital intensity, mil eur per mil t oil shale pro- 265 (Auvere CFB) 87 (Petroter I)
cessed a year
Labour intensity, persons per mil t oil shale pro- 25 125
cessed a year
Secondary outputs Heat Power, heat

Table 3. Summary of economic impacts of unconventional hydrocarbons

production in Canada and Estonia for the year 2014 [55-57]
Economic indicator Canada (oil sands) Estonia (oil shale)
Oil production, bbl/d 2300000 22000 (60000)*
Sales revenue, mil eur 40000 450/933**
Investment, mil eur 22700 263
Public energy R&D, mil eur 650 3.2
Private R&D, mil eur 606 5.2
Direct employment 22340 6683
Indirect employment 478000 17372
Government revenue, mil eur 4800 174
* – 60000 bbl/d would be oil production if all mined oil shale would be processed to oil. It is
necessary to calculate relative impact in Table 4 because data on oil shale industry R&D,
investment, sales, employment, etc., is not distributed between oil and power generation.
** – includes produced heat and power revenue.

Also evident from Table 4 is, on a relative scale, the lower investment
ratio that can be explained by a very active investment period of Canadian
oil sands of the period and presence of legacy capacity in Estonian oil shale.
The difference in R&D effort is evident in both the private and public
sectors. Substantially larger direct employment of oil shale compared to oil
sands is an expected result. Maybe less expected result of comparison is the
larger direct government revenue from oil shale. Explanation for the latter is
a 100% government ownership and dividend revenues from the largest oil
shale company, Eesti Energia.
Effect of Innovation in Unconventional Oil Industry: Case of Estonia and Canada 289

Table 4. Comparison of economic impacts of unconventional hydrocarbons

production in Canada and Estonia per millions of barrels produced for the year
2014
Economic indicator Canada (oil sands) Estonia (oil shale)
Sales revenue 47.6 42.4
Investment 27.0 12.0
Public energy R&D 0.8 0.15
Private R&D 0.7 0.24
Direct employment 26.6 303.0
Indirect employment 569.4 789.0
Government revenue 5.7 7.9

Part 4. Innovation led energy industry investments as a proxy for

economic effect

Multiplier effect captures the indirect and induced effects of a particular

economic activity. However, estimating multiplier effects is not precise and
their variability in time is significant given commodity price, employment,
cost structure changes, etc. Generated by research & development, the size
of investment is a measure in the capital-intensive energy industry, which
remains constant after the investment is made, and has to create economic
activity, employment and revenue to earn back the investment and return.
Investments themselves, due to a well-defined investment decision based on
the best available information, the need to earn back the invested capital over
time as well as the need to employ a large amount of direct and indirect
economic inputs over time to ensure economic production, represent the best
measure of the economic effect of cumulative innovation in the energy
industry. Thus, we suggest using investment as a best proxy to measure the
economic effect of research and development.
In 2009–2015 Estonian oil shale companies spent a total of 25.9 million
euros on research and development, which contributed to the 434.6 million
euros’ worth innovation led investments in physical capital in the whole
value chain of oil shale mining and processing by three companies (see
Table 5). Thus during that period the multiplier factor of research and
development was 13.2. In the same period, the total investment by company
was as follows: 428.8 million euros for Viru Keemia Grupp, 60 million
euros for Kiviõli Keemiatööstus and 1100 million euros for Eesti Energia,
totalling 1589 million euros.
Oil shale industry in future has high potential for further value added gains
through research and development. Most relevant is the aspect that shale oil
trades as heavy fuel oil with 1% at substantial 30% price discount compared to
crude oil dated Brent. This is due to the unique chemical composition of shale
oil having high sulphur, arsenic, nitrogen and oxygen contents and some ash
content, which makes its processing impossible even if blended with other
crude oils in regular refineries. However, it is entirely possible and likely that
290 Kalev Kallemets and Tõnis Tänav

with research and development upgrading of shale oil to higher value oil
products is possible, increasing the value of the product 30–40% and
necessitating investments of several million euros in the upgrading of
processing units. This partial upgrading opportunity of Estonian oil shale is
very similar in nature to that of Canadian heavy bitumen.

Table 5. R&D expenditure and innovation led investments by Estonian oil shale
companies (based on company data gathered by the authors)
Year 2009 2010 2011 2012 2013 2014 2015
Total R&D 440460 8791 51 2014245 3405938 4339255 5196411 1792327
expenditure
R&D led 38965817 27028862 2857538 118801217 109131259 90261953 47589366
investments
Another potential is processing of the pyrolysis gases to separate out
more valuable ethylene (C2H4), ethane (C2H6), butene (C4H8) and other gases
that comprise 31% of total pyrolysis gases of Enefit and Petroter
technologies and are of higher value as chemicals than as burning fuel [58].
There is also potential to increase mining efficiency with long-wall mining
under study by Eesti Energia, increase utilization of beneficiation waste
limestone, oil shale ash and low-pressure heat. Even the production units
already in exploitation are subject to intensive innovation. For example,
Petroter III oil shale processing unit, which was built in 2013–2015 after
Petroter II unit (built in 2012–2014), underwent about 60 minor and major
innovations [59].
All suggested measures pertaining oil shale related research will require
substantial public and private effort relatively similar to Canadian R&D
expenditure given in Table 4. Then, provided suitable price environment as
well, it is likely to lead to further investments and these in turn to related
economic impact.

Part 5. Discussion and conclusions

Compared to other policy options for unconventional hydrocarbons develop-

ment and economic impact, such as taxation, mineral resource allocation,
environmental regulation, R&D has the highest economic effect. It is only
due to innovation that we are able to utilize more sophisticated energy
sources than human labor. After ratification of the Paris climate agreement,
reduction of greenhouse gas emissions in unconventional hydrocarbons
production and carbon capture demand a high level of attention. This cannot
be resolved through other means than innovative processes developed
through constant trial and error together with healthy scientific and
commercial competition methods.
Canadian oil sands industry has a multitude of major and minor com-
panies developing innovative solutions to maintain competitive edge and
improve bottom line to their investors. Almost all companies are competing
Effect of Innovation in Unconventional Oil Industry: Case of Estonia and Canada 291

for mineral rights concessions and for investors at the stock exchange.
Alberta Province and Canadian government consider it justified to support
the industry research and development effort on a large scale.
Estonian oil shale industry is fairly segmented with a major state-owned
company and two smaller private companies. None are stock exchange listed
and competition for resource is limited to a legal battle in court and with the
permitting authority. In addition, their budget for R&D is much more
limited. However, the relative size of oil shale industry for Estonia is just as
significant as that of oil sands industry for Canada. Given the legal status of
minerals (they are state-owned), it is justified that Estonian government is
more engaged in R&D effort to ensure the economic and environmental
sustainability of the mineral sector.
Considering the competitive and environmental challenges of the oil
shale industry and other energy sector needs, the authors suggest that
compared with the 2014 levels, Estonian government should increase its
energy related research and expenditure 7 to 8 times and private businesses 3
to 4 times. Also, given the relative low effectiveness of the 2010–2015
Support of Energy Technology Research and Development program
and based on Canadian example, skilled innovation management institution
or professionals are necessary for the government to have R&D funding that
has practical value added to the industry as well as economic effect. It is also
relevant that research programs with the corresponding mechanism are
continuous, as innovation is not a project, but a non-linear process of
trial and error. Externalities justify Estonian government also to act to
facilitate innovation cooperation similarly to Canada Oil Sands Innovation
Alliance’s.

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Presented by E. Reinsalu and O. Trass

Received October 5, 2016